With a record number of enforcement cases resolved in recent years, the Financial Reporting Council (FRC) is continuing to show its determination to hold firms and individuals to account for serious accounting and audit failures. In this briefing, we set out five key themes for relevant firms and individuals to be aware of as we look ahead to potential areas of focus for FRC enforcement in 2024:
- timely conclusion of investigations, with uptick in case numbers longer term;
- individual accountability;
- use of non-financial sanctions;
- cooperation; and
- the delayed transition of the FRC to become the Audit, Reporting and Governance Authority (ARGA).
We also look at the FRC's supervisory focus for 2024/25, which may indicate areas for future enforcement activity.
By way of background, the FRC's core responsibility is to enhance public trust and confidence in the quality of audit, corporate reporting and governance, whilst supporting the UK's economic growth and international competitiveness. Part of this responsibility is driving up the quality of audits and reporting, including through action to detect and hold to account shortfalls in performance.
The FRC can investigate accountants, accountancy firms and actuaries under the Accountancy Scheme and Actuarial Scheme, as well as statutory audit firms and auditors under the Audit Enforcement Procedure, where there appears to be misconduct or a breach of the relevant professional standards.
1. Timely conclusion of investigations, with uptick in case numbers longer term
For a number of years, the FRC has emphasised the importance of timely investigative and enforcement action and has taken a number of steps to improve in this area. In line with this, and demonstrating the embedding of the initiatives already introduced, during the 2022/23 year we saw a record number of cases resolved by the FRC (19 cases), with financial sanctions reaching record highs and totalling more than £40 million (including an individual fine of £20 million), which is the highest financial sanction ever imposed by the FRC. This is despite the overall number of cases opened and closed during 2022/23 remaining largely consistent, with a drop in the number of investigations being opened from the previous year (10 versus 15).
The FRC's continued commitment to timely enforcement action is reflected in yearly improvements to its key performance indicator (KPI) (75% met the KPI, as published in its Annual Enforcement Review for 2023 in July 2023). We expect to see the FRC continuing to focus on timely conclusion of investigations in 2024.
In terms of case numbers, we anticipate seeing a rise in cases, with the FRC having said that it expects the current economic volatility may lead to an increase in the number of enforcement cases in the years to come.
2. Individual accountability
As noted above, the FRC can take enforcement action in respect of suspected misconduct by individual statutory auditors, accountants and actuaries who are members of the Institute and Faculty of Actuaries (IFoA). Over the last year, we have seen the FRC imposing sanctions against individuals, in the form of, amongst other things, fines and exclusions from the Institute of Chartered Accountants in England and Wales. We expect to see similar actions continuing during 2024. The FRC currently has no powers to investigate, take enforcement action or impose sanctions on individuals, including directors, who are not members of the professional accountancy bodies or the IFoA. However, the scope of the FRC's enforcement powers in this regard is the subject of consultation for legislative change as part of the FRC's proposed transition to become ARGA, the timing of which is discussed below.
3. Use of non-financial sanctions
The FRC sees itself as an "improvement regulator", in particular with regards to contributing to improving audit quality. One key tool it uses in this role is non-financial sanctions, which are tailored to identified failures and are developed in collaboration with a firm's supervisor to ensure that they are effective. In addition to imposing financial penalties, the FRC continued to use non-financial sanctions as part of its enforcement during the 2022/23 period.
Examples of non-financial sanctions imposed by the FRC included requiring a firm to review and amend certain training programmes and prohibiting an audit engagement partner to sign any statutory audit report for a certain period. We expect to see the continued use of non-financial sanctions during 2024, complementing rather than replacing financial sanctions.
4. Cooperation
The FRC has said that it is continuing to see a growing commitment to self-improvement and in the readiness of parties to identify and address errors. As with other UK enforcement authorities, we have seen examples of the FRC reducing fines imposed on firms and individuals due to their cooperation during an investigation. The Annual Enforcement Review for 2023 mentioned above includes a chapter setting out the FRC's expectations in this area. To assist firms under investigation, the Review lists the minimum level of cooperation expected from subjects during an investigation. The nature and level of cooperation is generally assessed across four categories:
- Timeliness – full helpful and timely responses;
- Engagement – being fully prepared for interviews;
- Transparency – self-reporting, voluntary waiver of privilege; and
- General approach – proactive identification and implementation of effective remediation.
Moving into 2024, firms should be aware of the FRC's expectations regarding cooperation and the factors taken into account when issues do arise. Firms should look to positively engage with the FRC and, with appropriate legal advice, demonstrate these factors with their actions to mitigate any issues to the extent possible.
5. Delayed transition to ARGA
The FRC's transition to become ARGA is yet to occur, with the change dependent on new legislation and some uncertainty as to when that legislation may be passed. In the meantime, on 15 December 2023, the FRC published its Plan and Budget for 2024/25 (draft for consultation) which states that, for this period, the FRC will use its enforcement powers effectively by focusing its investigations and enforcement action on firms and individuals for misconduct in the most serious matters and on the highest priority areas of regulatory concern.
Future enforcement areas
Finally, in terms of areas of future enforcement, these often follow supervisory priorities and in December 2023, the FRC announced its supervisory focus areas for 2024/25 for corporate reporting reviews and audit quality inspections. This provides that the FRC's programme of corporate reporting reviews and audit quality inspections in the coming year will pay particular attention to:
- risks related to the current economic environment – for example going concern and recoverability. Other risks in this area include a potential increase in fraud (which was a 2022/23 supervisory focus) and other forms of financial crime;
- climate related risks, including TCFD disclosures, where the FRC has emphasised in earlier publications that ESG is an increasingly important theme for investors and that reliable information, free from greenwashing, and subject to high-quality assurance is critical;
- implementation of IFRS 17 – Insurance Contracts; and
- cash flow statements.
Firms should be particularly mindful of these areas and responses to related supervisory requests.
Of note, some issues may result in firms and individuals being investigated by more than one regulator (for example, the Financial Conduct Authority as well as the FRC), which can be particularly difficult to navigate from a response perspective and where implementing a co-ordinated response strategy is key. In the event that you receive enquiries from the FRC or are under investigation there are some immediate steps you can take to protect your position and we recommend seeking advice at an early stage.
The content of this article is intended to provide a general guide to the subject matter. Specialist advice should be sought about your specific circumstances.
